Report shows gradual pickup in solid waste volumes

Apr 01, 2005

While large solid waste management firms reported revenue growth in 2004, rising fuel prices and, in some cases, increasing fleet maintenance costs are likely to weigh on earnings in 2005, says Standard & Poor's Equity Research in a semiannual study of the industry.

The report, the "Environmental & Waste Management Industry Survey," is published twice yearly by Standard & Poor's, a provider of independent investment research, ratings and indices.

"Waste haulers will continue to focus on pricing initiatives as long as fuel prices remain high and regional market share is maintained," said Stewart Scharf, Environmental Services Analyst with Standard & Poor's Equity Research Services. Fuel accounts for as much as 5 percent of a trash hauler's operating costs.

Waste haulers raised customer rates and landfill tipping fees in 2004 and are considering further hikes in 2005. (Tipping fees are the cost to third parties to dump trash in company-owned landfills.) "However, competitive pressures may make raising prices more difficult, particularly if economic conditions soften significantly," added Scharf. "Intense competition among trash haulers, particularly in the Midwest, makes it difficult to raise pick-up and hauling fees."

"Waste management providers also improved profitability in 2004 through increased internalization rates. Trash haulers utilize their own landfills, which is generally more cost-efficient than traveling to third-party landfills. In recent years, the large solid waste management firms have participated in asset swaps to align landfills closer to their major routes. As a result, the trash haulers have increased their internalization rates, which is dumped into their own landfills."

Meanwhile, water utilities continue to benefit from rate hikes and growth in their customer base. State regulatory agencies approved numerous rate increases for water supply and wastewater treatment providers in 2004. Over the longer term, funding shortfalls for infrastructure improvements will have to be addressed on the federal or state level.

"As political pressure increases to deal with water system inadequacies, funding to municipally owned water utilities is likely to increase," continued Scharf. "We also expect major growth for water desalination projects, a process in which salt is removed from seawater to provide drinking water. These programs are likely to be particularly popular in states such as Nevada, Arizona, California and Texas, where droughts are an ongoing concern (despite excessive rainfall recently in some areas) and the population is expanding."